Sunday, July 17, 2011




One of the problems all of us have is fear of difficult situations. It is this fear that causes us to always try and predict the future so we can avoid those difficult periods. It is very easy to feed into those fears and there are certainly alot of people doing that nowadays. Maybe it is just what I get hit with, but it seems like every time I turn around I am getting something sent to me with Apocalypse, Armageddon, collapse etc.. I do think some of these people truly believe what they are writing about, and others probably do it just to make money. The ones to watch out for are the ones with no track record of ever making any money that tell you to do one thing or another.

I have to admit that I do have some worries over how all of the big picture problems are going to eventually work themselves out. It does seem to me that continuing to add leverage to things, when leverage created the problems in the first place, cannot possibly work. What also bothers me more than newsletter writers foretelling in the end of the world, is public officials who are lying about it. Since I am of the opinion that people don't change, I think this type of thing has always been going on. We are just more aware of it now because of all of the electronic advancements that have created lightning speed in news dissemination. It is particularly bothersome when the head of the Federal Reserve is clearly lying to the people, and also engaging himself in politic fear mongering.

There are times when you have to putt out, make a triple bogey, and go on to the next hole. How long do you want to prolong the inevitable? Continuing to leverage is just inflating another bubble, and we know all too well how things always end with bubbles.

Here are the bubbles I see that are inflated right now, some more so than others, but all extended too far artificially for varying reasons. History has told us if we just keep it simple and base our decisions on what has happened in the past, reversions to the mean will happen.

Bubble #1

Obviously the biggest bubble is the metals. If you look back in history, there is no time when price has ever moved this much for this long. Is it different this time? History always tells us no on this question. In as much as the Armageddon people have predicted this rise correctly, they will also be trapped in an inflexible view at the wrong time. Whenever we get the types of arguments as to why something that has gone this far will keep going even when it has not historically, we do get the reversal in price. We all remember the "they are not making any more land" argument here in California during the Real Estate Bubble. I do equate this with the prediction for the end of the US currency system. These arguments are the same, they predict something that has never happened before continuing. Make no mistake about it I trade the trends, so I see no reason to be short here, these are big picture points.

Bubble #2

The US stock  market would have to also fall into this category. Although the profits in the companies are real, they have been created by an artificial move by the US Federal Reserve, so it is likely a reversion is coming here. It could well be as it is with the metals, that the trend here is so well established, that any sharp reversions are long term buys. They also may well continue to carry on. We have had hints now that the FED seems to be intent on continuing on adding debt and stimulating stock and commodity prices. Comrade Ben seems to have his finger on the trigger as I speak, for QE3. However, the time for a big stock market decline is coming.

Bubble #3

China. One of the things that seems to be the most over looked in all of what is going on is that China is more over leveraged in construction and real estate than the US was at it's peak by a considerable margin. One of the things that bothers me the most about the arguments for continued commodity surges is that the one reason the people who argue for his cite as the reason for it is China.


If China is a collapse in training, would not demand from there decline during a collapse? I just don't see how the people who argue for the collapse of everything, rioting, runaway inflation, starvation etc.. can expect with such conditions that demand would increase? If everyone is fighting to stay alive and find food, there is not going to be an increase in demand during such a period. Further, I just don't see how metals will be that valuable as barter. I would want food and water, not a chunk of metal if we are going to Mad Max types of conditions. Here is something else people have not considered. If things get that bad the places storing your life savings will either be out of business and raided by desperate people. Your assets will not be secure.

This is what is bothering me, the reconciliation of tough times coming with it's effect on demand. I fail to see when I just think about the basic premise, how really tough times will increase demand. If I got into self survival mode I would not be driving my car much, hence I would consume less gas ( Oil ). The basic premise of pricing is prices rise on increased demand and decline on decreasing demand. This is completely lost in these arguments. Other than raw essentials such as food, people will consume less as prices rise, so the inflation argument gets lost with me. I do know from the other business interests I have, the economy is much weaker than what we are hearing in the media and from the government. I don't really think all this political crap that is going on matters that much. The problems that are out there can't be fixed by that debate.

Another problem that I see with the disaster argument and what you should do, is that you need to get your  money out of the US. At this point if Barry gets another 4 there is a good  chance I will  consider leaving the US because I don't want to live in a socialist country and be attacked constantly if I have success. However, putting our money outside of the US to get it out of the dollar puts it at more risk. Many other countries do not provide the safety and guarantees to make you whole during bank failures, and the government debt problems in many other countries are worse than they are here. You could have all your money somewhere you think is safe and it could completely disappear when the bank goes down. Be careful with that one. I am not sure that living in California the land of the now mandated gay history education is any better. I can't wait to see how these characters create revisionist history to claim that all the great heroes were gay. Christopher Columbus, Thomas Edison. Albert Einstein was kind of hot with that wild hair wasn't he? How about Robinhood with the tights, that must have meant he was gay?

Aye Carumba, these whacked out liberals are great for comedy.


There was a question in another thread here about what are the trading rules?

I do not divulge here exactly how I do every trade, that is something I will never do even for a fee. These techniques I have developed have taken 20 years, and it would take $10 million dollars or more for someone to get me to sell them because I know once I do that they will no longer be effective. However, there is another reason why they may or may not be effective. Trading rules have to fit your individual personality. What works for me may or may not work for someone else.

I like to sell below daily lows and buy above daily highs. Some people think that is "too late." They want to front run things and have smaller stops. That in general is a bad way to trade, but I am sure some people can pull it off. Those I know that try it lose money. What is important is that you develop an approach that has some structure to it. You need to know how you will enter a trade and where your exit points are. This could mean you will buy when a moving average crosses another and exit when it crosses back in the other direction. This is overly simplistic, but is is an example of a strategy that could be easily adhered to. When I mention follow the rules this is what I am talking about. In this case no matter what else was going on in the world you would just buy when the averages crossed and exit when they crossed  in the other direction.

You also must decided if you want any discretion in your exits. I try to go for profit targets and that leaves a little wiggle room in determining what they will be. They also could change as a trade progresses. Some people may not do well with that type of discretion, there is no one size fits all answer. It is up to you as an individual trader to determine what your rules will be, I just suggest that you develop some so you are not winging it.

As for this week, my view has not changed, I am looking for a bounce to get short in several places. I do not have any buy signals anywhere at this point. If we launch back upward negating what I see as potential sell signals in waiting, I will look to buy pullbacks. It is that simple for me, and it is part of my rules. I display trades here the way I do them for educational purposes, I do not recommend trades. There may be a time  when I get back into that business and if I do there will be a link to it from here.

Good luck trading this coming week


Mingoman said...

Thanks for answering my question Chris! Greatly appreciated.

Konrad Sherinian said...

Interesting post - first one I managed to catch in awhile. Interesting stuff - you seem to be bearish. I am actually on the other side - I suppose that is what makes a market. A few of my reasons are the monster move we had a few weeks ago (best week ever for me) and the present setup in the dollar (short to me) / Euro (long to me)(probably will pass on it as pound looks much better) and the present setup in the Nasdaq (commercials have perfect record since early '10). Anyways, good luck & good trading!

Return to Resistance said...

With all due respect, your comment about the metals bubble is ass backwards.

What I mean is that the metals rally is inversely proportional to the health of the sovereign debt markets AND the confidence in the monetary policies of the central authorities.

The biggest bubble out there is the debt markets. The entire US yield curve is overpriced.

Sure, silver got ahead of itself, but pull up a monthly chart in gold and you'll see a steady, well behaved rise.

When the waterfall decline in the debt comes you'll see an inverse parabolic rise in gold. That hasn't happened in the US yet, but the contagion roles on....

Chris Johnston said...

No worries if we all agreed prices would never move. I am trading metals recently from the long side the bubble view is just a big picture opinion not what I trade from. You may be right I try not to get married to an opinion.

Konrad I am looking for a bounce as I have been saying in here and then we will see if the short is there. I did get that recent low call right then the high also. Here we are kind of in the middle of the range.

Anonymous said...

When I read this post a few days late I thought maybe you were teeing off of Charles Hugh Smith but then noticed the dates and maybe he is the one teeing off you-haha.
Check it out

He is an incredibly brilliant mind and writer and seems to bounce back & forth between politics and the markets. He's another California guy; I gather from what I have read he lives in the Sierra foothills. Just an FYI.
Don in Virginia